The type of debt you have plays an important role in what happens if you default on a loan. There are two types of debt. Secured and unsecured debt.
Secured Debt is any debt that is backed by some sort of physical property, such as a car loan or a mortgage. The car loan is secured by the car itself and the mortgage is secured by the home.
In the event you fall behind on your payments on a secured debt, your creditor has the right to take back the property (repossess), sell it and apply the proceeds to the debt that you owe. Additionally, you may still have a balance owed even after the sale of the item is applied to the debt.
Dealing with your secured debt in bankruptcy can be done one of two ways. The first way is by filing for Chapter 7 bankruptcy and returning the item so that you no longer have to make payments on it. The other option is to restructure your payments by filing for Chapter 13 bankruptcy and keeping the item. Either way, with any secured debt the creditor gets something in return.
Unsecured Debt is typically a debt you incur to obtain goods and services. It can be medical debt, a student loan, a credit card or a personal loan. Essentially, there is no collateral tied to the debt. With this type of debt the creditor won’t be able to repossess the item you purchased but they are able to take legal action or garnish your wages to recover a balance owed.
Filing for bankruptcy can ease the burden of both secured and unsecured debt. Filing for bankruptcy may even help you keep your car, stop wage garnishments, and remove some or all of your debt. Contact Minnesota Bankruptcy Attorney Gregory Wald for more detailed information specific to your situation.